Tariffs are a specific type of tax imposed by governments on imported goods before they are allowed entry into the country. This effectively raises the price of foreign goods compared to local competitors.
What are Tariffs?
Tariffs are a special type of tax applied to goods based on the geographic location from which they originated. The tax is imposed as a percentage of the total cost of the product, including shipping and insurance. In the United States, tariffs are set by Congress.
Alternative names: customs, tariffs, import duties
Note: Although tariffs primarily apply to imported goods, some exported goods may be affected by specific tariffs.
How do Tariffs Work?
Tariffs work by increasing the price of imports. These higher prices give an advantage to domestic products within the same market. They are used to protect the country’s industry.
Despite the protectionist motives, tariffs are considered a barrier to international trade and business in general. Other countries often respond by imposing their own tariffs.
Note: A non-partisan study by the Congressional Budget Office (CBO) showed that tariffs imposed in 2018 significantly reduced household income and gross domestic product (GDP) by the summer of 2019.
As of 2018, U.S. tariffs averaged less than 2%. Countries impose different tariff rates based on the industry they are protecting. They may also impose sales taxes, local taxes, and additional tariffs. Governments collect these at the time of customs clearance.
Countries may waive tariffs when they have free trade agreements with one another. The United States has trade agreements with 20 countries. American companies target their exports to these countries because they won’t face any tariffs that affect their profits. Their foreign customers also benefit from paying less for duty-free American exports.
The Harmonized Tariff Schedule sets specific tariffs for all 99 categories of U.S. imports. It is called “harmonized” because it is based on an internationally standardized system that allows countries to uniformly classify traded goods among themselves. The system describes most traded goods in the world. This information is published by the International Trade Administration.
The tariff schedule is a guide. U.S. Customs and Border Protection is the final authority that determines tariffs. It is the only entity that can provide legal advice. It also assists in determining the classification of your imports.
Advantages and Disadvantages
Advantages
1. Domestic threatened industries may request tariffs: When a domestic industry feels threatened, it asks Congress to impose tariffs on imports from foreign competitors. This allows the government to please key players in the domestic industry.
2. Can create more local jobs in certain industries: When tariffs are imposed on goods, the industry producing those goods often sees an increase in job creation. This helps employ more people in that sector.
Disadvantages
1. Consumers pay higher prices: Tariffs are a tax, and like any tax, they increase the price that consumers pay for the good.
2. Affects relationships with other countries: Countries do not like when tariffs are imposed on their exports, so relationships between countries often deteriorate. They often respond by imposing their own tariffs on similar products.
Examples of Tariffs in the United States
The following examples of tariffs in the United States illustrate how these taxes on imports work.
Steel and Aluminum Tariffs in 2018
On March 1, 2018, President Donald Trump announced that he would impose a 25% tariff on steel imports and a 10% tariff on aluminum. The stated goal was to create more local jobs and help the U.S. steel and aluminum industries grow. By 2019, the Congressional Budget Office found that this policy had a negative effect on the economy, predicting a decline of about 0.3% in the U.S. GDP by 2020 due to the tariffs.
Tariffs
The Great Depression
The tariffs also contributed to the economic difficulties experienced during the Great Depression in 1929. In June 1930, the Smoot-Hawley tariff raised already high tariffs on agricultural imports. The aim was to support American farmers who had been affected by the “Dust Bowl.” The high food prices harmed Americans who were suffering from the effects of the Great Depression. It also prompted other countries to retaliate by imposing their own protective measures. As a result, global trade fell by about 65%. Since then, most countries have been hesitant to impose tariffs.
Agricultural Tariffs in the 1920s
In 1922, Congress imposed the Fordney-McCumber tariffs on imported goods, especially agricultural products. Lawmakers were responding to an agricultural surplus. During World War I, European farmers were unable to produce. They were replaced by other countries in their food supply. When European farmers returned to production, food supplies increased beyond global demand. With falling prices, American farmers complained.
Tariff of Abominations in the 1820s
On April 22, 1828, the federal government imposed the Tariff of Abominations on most imports. Its aim was to protect industries in the Northeast. Instead, it harmed the South. It did two things by raising the prices on imports.
First, it increased costs for most goods. This significantly harmed the agrarian South. Secondly, it reduced trade with England, the South’s main partner in cotton purchasing. When British companies could not compete with New England manufacturers, they bought less cotton. As a result, Southern costs rose and revenues fell. For this reason, Southerners called these tariffs “abominations.”
The opposition to the tariffs helped elect Andrew Jackson as President of the United States. He defeated John Quincy Adams, who supported the tariffs. Vice President John Calhoun drafted a memorandum and protest from South Carolina, which granted states the right to nullify any federal law they disliked. In November 1832, the South Carolina legislature nullified the tariffs. This move led to a constitutional crisis over states’ rights. In January 1833, the state withdrew. However, tensions remained high, contributing to the start of the Civil War.
Takeaway
Tariffs are taxes paid by consumers of imported goods, raising the prices of imported goods from the other country. Tariffs are often effective protective barriers – they raise the price of foreign products that compete with domestic products. Although tariffs aim to protect domestic industries, they can negatively impact the economy overall, especially if countries retaliate by imposing their own tariffs. Tariffs cannot exist in free trade agreements.
Source: https://www.thebalancemoney.com/tariff-pros-cons-and-examples-3305967
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